For most, wallets get a little bit plumper from state tax changes

But gains are likely to be modest

Jul. 7, 2013

Written by

Russ Zimmer

CentralOhio.com

Within a few weeks, employed Ohioans will notice a few bucks more in each paycheck as a result of state income tax changes in the new Ohio budget. Some of that savings, however, will be going right back to the government through an increased sales tax also contained in the state’s spending blueprint.

Gov. John Kasich’s signed the 2013-14 Ohio state budget a week ago, and its tax changes took effect Monday.

Chief among those is the reduction of the state income tax by 10 percent during the next three years. That is counterbalanced somewhat by an increase in the state sales tax rate from 5.5 percent to 5.75 percent. The $2.7 billion tax cut package also includes a sharper reduction for business income, the elimination of state subsidies on property taxes and a new tax credit for low- and middle-income families.

Lee Beall, CEO of the Columbus-based accounting firm Rea and Associates, said the changes should be reflected in worker pay immediately, but he characterized the modifications as “low-impact” on most families.

Looking at a $60,000-per-year household — four members, two incomes — shows nominal savings from the income and sales tax changes, Beall said. Provided no major purchases are ahead for 2013, that particular family would have a net benefit of about $100 during the course of 12 months, according to his projections.

“This family isn’t going to feel it until they go out and buy a car or a furniture set or something of that magnitude,” said Beall, a former president of the Ohio Society of Certified Public Accountants.

The tax changes will shift more of the burden for paying for government from higher earners to low- and middle-income households, according to Wendy Patton, fiscal project director at a policy research firm with a liberal tilt, Policy Matters Ohio.

The group prepared an analysis of all the major tax changes contained in the budget and determined that taxpayers at the bottom — people making on average $11,000 a year — will end up paying a little more, an estimated $12 a year. Meanwhile, the top 1 percent of households — those making an average of $897,000 annually — will pay $6,000 less in total tax.

“At the lowest end, where people can least afford it, people are actually paying more in state taxes, which is manifestly unfair,” Patton said. For 475,000 Ohio households of lesser means, there is a new state earned income tax credit, which is based off the federal tax break of the same name.

On the other end of the political spectrum, Greg Lawson, policy director for the conservative Buckeye Institute, said the tax policies in the state budget were a decent starting point, but should not be the end goal. He said directing more of the state’s taxes to consumption — sales — is good policy, but the most recent effort still leaves the state income tax too high.

Business income

Owners of pass-through entities, meaning businesses whose income goes directly to ownership, can claim those earnings as personal income. Under the new budget, taxpayers reporting business income will get a 50 percent break on up to $250,000.

Mark Engel, who leads law firm Bricker and Eckler’s Ohio state and local taxation practice, said the savings from this tax cut might boost productivity, but perhaps more as a result of equipment upgrades rather than new jobs.

“I think the question to ask yourself is how many people do you know that would be willing to work for $2,000 (a year)?” Engel said.

Taxable business income

2013 tax owed before changes

2013 tax owed

2014 tax owed

2015 tax owed

3-year tax savings

$60,000

$1,878

$644

$641

$634

$3,715

$100,000

$3,639

$2,471

$2,457

$2,430

$3,560

$200,000

$9,090

$3,330

$3,311

$3,275

$17,354

$250,000

$12,053

$4,570

$4,538

$4,502

$22,548

Source: Projections from Bricker and Eckler

Personal income

Personal income

Rates across all income brackets decline by 8.5 percent this year and will decline from existing rates by 9 percent in 2014 and 10 percent in 2015.

Taxable personal income

2013 tax owed before changes

2013 tax owed

2014 tax owed

2015 tax owed

3-year tax savings

$30,000

$689

$630

$627

$620

$190

$60,000

$1,853

$1,696

$1,686

$1,668

$509

$100,000

$3,594

$3,289

$3,271

$3,235

$987

$250,000

$11,936

$10,921

$10,862

$10,742

$3,283

The new rules suspended inflation indexing of income tax brackets and exemptions for three years, meaning the income boundaries separating the different tax rates will not change until 2016 even if the buying power of the dollar drops.

Earned Income Tax Credit

Low- and middle-income taxpayers are familiar with the federal earned income tax credit, or EITC. Depending on an individual’s or couple’s earnings and number of children, the federal EITC can be worth more than $6,000, according to the Tax Policy Center.

Ohio will become the 25th state to adopt a state EITC. Unlike most of those states and the federal version, Ohio’s EITC is nonrefundable, meaning it can reduce or eliminate tax liability but it can never result in a payment from the government.

Other conditions:

• the state EITC will equal 5 percent of the federal EITC for the same year. For a single parent or couple with two children, that state’s credit could be worth as much as $268;

• if your income is above $20,000 after exemptions, the state EITC cannot be equal to more than 50 percent of what your tax owed would otherwise be;

• the creation of the state EITC is coupled with the elimination of a $20 personal exemption credit for returns reporting more than $30,000 in state taxable income.

The left-leaning think tank Policy Matters Ohio has been lobbying for a state EITC, but they would have drafted one at least twice as big and made it refundable.

Wendy Patton, who works on budget and tax issues for the group, said this is only a start.

“We feel it is something that can be built upon, and that’s a good thing,” she said.

Sales tax

Sales tax

Taxes on consumption tend to hit the poor proportionally harder, the opposite effect of income taxes.

The IRS estimates how much sales tax a household would generate in a year for deduction purposes. Below are projections for a four-person household with the old 5.5 percent tax and that same estimate but with the new rate applied. These figures do not include the local share of the sales tax, which is not changing as a result of the state budget.

Income range

Estimated state sales tax paid

With new rate

$40,000-$50,000

$647

+$29

$70,000-$80,000

$836

+$38

$100,000-$120,000

$1,008

+$46

$200,000 or higher

$1,682

+$76

Gov. John Kasich originally proposed a wide expansion of the state’s sales tax to include more services and goods that hadn’t previously been subject to it. That attempt was quickly quashed, but the sales tax did branch out in a couple of ways. Magazine subscriptions are one, but the other will attract more attention.

“The one that may really affect the Average Joe is the expansion of the sales tax to digital products,” said Mark Engel, who monitors state and local tax policy for the Ohio law firm Bricker and Eckler. “People who download off iTunes, books, movies.”

In addition to 99-cent songs and other downloadable media, premium streaming video services from providers such as Netflix, Amazon and Hulu, would also be taxed at 5.75 percent. This does not apply to products purchased online, the sales tax for which the customer is supposed to remit to the state under longstanding but often ignored law.